Comparative Advantage

Here is a recent essay intended to explain the principle of comparative advantage:

The famous author Leonard Funk has a large garden, and his study overlooks the immaculate lawn. He is proud of his garden, enjoys tending to it, and will spend most weekends sharing his time between writing and gardening.

This weekend, however, Leonard has an important deadline in which to finish his latest manuscript and now that his time has become scarcer, he must make an economic decision. Every hour he spends in the garden, is an hour he can’t spend writing, so he’ll focus on the activity that’s most valuable to him. This weekend, it’s writing.

He hires Jim to mow the lawn, and settles in the study to begin typing. But Jim can’t mow in a straight line, he keeps taking a break, and is taking far longer to complete the task than Leonard normally takes. We can say that Leonard is the more productive gardener, and the more productive writer. He can mow more square feet per hour than Jim, and can write more pages per hour than Jim. Leonard has an absolute advantage over Jim in both gardening and writing.

But clearly they both benefit from Jim’s presence. This is because even though Leonard is more productive at both tasks, he’s not as more productive at both. If Leonard does what he’s the “most best” at, and Jim does what he’s “least worst” at they can both benefit from cooperating.
This is the principle of comparative advantage: exchange is mutually beneficial if one produces that which he can do at lowest opportunity cost.
Jim is willing to mow Leonard’s lawn at a lower cost to Leonard than he can do it himself, in precisely the same way that whenever we buy a good or service, it’ll usually be far far cheaper than if we gave up the time and resources necessary to produce it for ourselves.

If both Leonard and Jim face a similar situation each week, we might expect them to adopt a routine. The more time Jim spends gardening, the more we can expect him to improve. Even Leonard’s frustrations at having someone perform a task more poorly than he could do it himself will help matters: Leonard has an incentive to provide Jim with a better lawnmower with the extra money he’s made from the extra time he has for writing. Indeed Jim might well become a better gardener than Leonard since he has specialised and invested in his task.
This is the process in which we have a “division of labour”, meaning that jobs tend to be tasks that are related to each other, but are separate operations. Knowing where to specialise, and how to divide up labour is the driving force behind the massive output and productivity of modern industry.

Download the full essay here.pdf (3 pages)
Link to exercises here